Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission file number: 814-00704

 

 

GLADSTONE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   83-0423116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100
MCLEAN, VIRGINIA
  22102
(Address of principal executive offices)   (Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Trading Symbol(s)

  

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value per share    GAIN    The Nasdaq Stock Market LLC
6.250% Series D Cumulative Term Preferred Stock, $0.001 par value per share    GAINM    The Nasdaq Stock Market LLC
6.375% Series E Cumulative Term Preferred Stock, $0.001 par value per share    GAINL    The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☐  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 2, 2020 was 33,205,023.

 

 

 


Table of Contents

GLADSTONE INVESTMENT CORPORATION

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION:

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Statements of Assets and Liabilities as of September  30, 2020 and March 31, 2020

     2  
 

Consolidated Statements of Operations for the three and six months ended September 30, 2020 and 2019

     3  
 

Consolidated Statements of Changes in Net Assets for the three and six months ended September 30, 2020 and 2019

     5  
 

Consolidated Statements of Cash Flows for the six months ended September 30, 2020 and 2019

     6  
 

Consolidated Schedules of Investments as of September  30, 2020 and March 31, 2020

     7  
 

Notes to Consolidated Financial Statements

     19  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  
 

Overview

     45  
 

Results of Operations

     50  
 

Liquidity and Capital Resources

     58  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     65  

Item 4.

 

Controls and Procedures

     65  

PART II.

 

OTHER INFORMATION:

  

Item 1.

 

Legal Proceedings

     66  

Item 1A.

 

Risk Factors

     66  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     66  

Item 3.

 

Defaults Upon Senior Securities

     66  

Item 4.

 

Mine Safety Disclosures

     66  

Item 5.

 

Other Information

     66  

Item 6.

 

Exhibits

     67  

SIGNATURES

     68  


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     September 30,     March 31,  
     2020     2020  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $313,703 and $276,589, respectively)

   $ 316,228     $ 292,129  

Affiliate investments (Cost of $320,651 and $311,481, respectively)

     264,777       247,637  

Control investments (Cost of $21,512 and $21,512 respectively)

     27,957       26,158  

Cash and cash equivalents

     1,667       2,778  

Restricted cash and cash equivalents

     889       1,282  

Interest receivable

     2,153       3,429  

Due from administrative agent

     12,220       771  

Deferred financing costs, net

     846       991  

Other assets, net

     1,528       1,202  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 628,265     $ 576,377  
  

 

 

   

 

 

 
    

LIABILITIES

    

Borrowings:

    

Line of credit at fair value (Cost of $116,600 and $49,200, respectively)

   $ 116,600     $ 49,200  

Secured borrowing

     5,096       5,096  
  

 

 

   

 

 

 

Total borrowings

     121,696       54,296  

Mandatorily redeemable preferred stock, $0.001 par value per share, $25.00 liquidation preference per share; 8,990,000 and 6,500,000 shares authorized; 5,548,610 and 5,290,000 shares issued and outstanding, respectively, net

     135,722       129,160  

Accounts payable and accrued expenses

     1,006       1,222  

Fees due to Adviser(A)

     7,731       7,178  

Fee due to Administrator(A)

     358       582  

Other liabilities

     1,226       14,908  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 267,739     $ 207,346  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

   $ 360,526     $ 369,031  
  

 

 

   

 

 

 
    

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 100,000,000 shares authorized, 33,205,023 and 33,049,463 shares issued and outstanding, respectively

   $ 33     $ 33  

Capital in excess of par value

     402,156       401,023  

Cumulative net unrealized depreciation of investments

     (46,904     (43,658

Underdistributed net investment income

     2,219       6,370  

Accumulated net realized gain in excess of distributions

     3,022       5,263  
  

 

 

   

 

 

 

Total distributable earnings

     (41,663     (32,025
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 360,526     $ 369,031  
  

 

 

   

 

 

 
    

NET ASSET VALUE PER SHARE AT END OF PERIOD

   $ 10.86     $ 11.17  
  

 

 

   

 

 

 

 

(A)

Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

(B)

Refer to Note 10 — Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

2


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2020     2019     2020     2019  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 7,014     $ 6,636     $ 12,978     $ 12,476  

Affiliate investments

     4,616       7,274       8,964       13,083  

Control investments

     210       214       419       428  

Cash and cash equivalents

     —         19       4       31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     11,840       14,143       22,365       26,018  

Dividend income

        

Non-Control/Non-Affiliate investments

     —         612       —         2,727  

Affiliate investments

     —         —         —         3,080  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     —         612       —         5,807  

Success fee income

        

Non-Control/Non-Affiliate investments

     —         —         182       —    

Affiliate investments

     —         1,881       —         2,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     —         1,881       182       2,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     11,840       16,636       22,547       33,946  
  

 

 

   

 

 

   

 

 

   

 

 

 
        

EXPENSES

        

Base management fee(A)

     2,989       3,144       5,845       6,315  

Loan servicing fee(A)

     1,747       1,593       3,456       3,345  

Incentive fee(A)

     452       1,600       (302     3,169  

Administration fee(A)

     390       423       836       737  

Interest expense on borrowings

     1,055       1,207       1,972       2,266  

Dividends on mandatorily redeemable preferred stock

     2,158       2,090       4,260       4,180  

Amortization of deferred financing costs and discounts

     466       373       840       746  

Professional fees

     254       467       825       971  

Other general and administrative expenses

     778       1,357       1,535       1,954  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     10,289       12,254       19,267       23,683  
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to base management fee – loan servicing fee(A)

     (1,747     (1,593     (3,456     (3,345

Credits to fees from Adviser – other(A)

     (1,070     (608     (1,805     (1,830
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits to fees

     7,472       10,053       14,006       18,508  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,368       6,583       8,541       15,438  
  

 

 

   

 

 

   

 

 

   

 

 

 
        

REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     47       791       60       1,321  

Affiliate investments

     574       20,353       1,314       20,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain

     621       21,144       1,374       21,677  

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     (4,076     8,231       (13,014     7,465  

Affiliate investments

     6,612       (26,617     7,970       (26,118

Control investments

     (895     1,532       1,798       (1,248

Other

     —         131       —         (164
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     1,641       (16,723     (3,246     (20,065
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     2,262       4,421       (1,872     1,612  
  

 

 

   

 

 

   

 

 

   

 

 

 
        

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 6,630     $ 11,004     $ 6,669     $ 17,050  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

3


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended September 30,      Six Months Ended September 30,  
     2020      2019      2020      2019  

BASIC AND DILUTED PER COMMON SHARE:

           

Net investment income

   $ 0.13      $ 0.20      $ 0.26      $ 0.47  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 0.20      $ 0.34      $ 0.20      $ 0.52  
  

 

 

    

 

 

    

 

 

    

 

 

 

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

           

Basic and diluted

     33,205,023        32,822,459        33,148,652        32,822,459  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

4


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     2020     2019  

NET ASSETS, MARCH 31

   $ 369,031     $ 407,110  

OPERATIONS

    

Net investment income

     4,173       8,855  

Net realized gain on investments

     753       533  

Net unrealized depreciation of investments

     (4,887     (3,047

Net unrealized appreciation of other

     —         (295
  

 

 

   

 

 

 

Net increase in net assets from operations

     39       6,046  
  

 

 

   

 

 

 
    

DISTRIBUTIONS(A)

    

Distributions to common stockholders from net investment income ($0.28 and $0.20 per share, respectively)

     (9,272     (6,523

Distributions to common stockholders from net realized gains ($0.02 and $0.09 per share, respectively)

     (666     (3,127
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (9,938     (9,650
  

 

 

   

 

 

 
    

CAPITAL ACTIVITY

    

Issuance of common stock

     1,772       —    

Discounts, commissions, and offering costs for issuance of common stock

     (35     —    
  

 

 

   

 

 

 

Net increase in net assets from capital activity

     1,737       —    
  

 

 

   

 

 

 
    

NET DECREASE IN NET ASSETS

     (8,162     (3,604
  

 

 

   

 

 

 
    

NET ASSETS, JUNE 30

   $ 360,869     $ 403,506  
  

 

 

   

 

 

 
    

OPERATIONS

    

Net investment income

     4,368       6,583  

Net realized gain on investments

     621       21,144  

Net unrealized appreciation (depreciation) of investments

     1,641       (16,854

Net unrealized depreciation of other

     —         131  
  

 

 

   

 

 

 

Net increase in net assets from operations

     6,630       11,004  
  

 

 

   

 

 

 
    

DISTRIBUTIONS(A)

    

Distributions to common stockholders from net investment income ($0.20 and $0.16 per share, respectively)

     (6,553     (5,236

Distributions to common stockholders from net realized gains ($0.01 and $0.07 per share, respectively)

     (420     (2,444
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (6,973     (7,680
  

 

 

   

 

 

 
    

NET (DECREASE) INCREASE IN NET ASSETS

     (343     3,324  
  

 

 

   

 

 

 
    

NET ASSETS, SEPTEMBER 30

   $ 360,526     $ 406,830  
  

 

 

   

 

 

 

 

(A)

Refer to Note 9 — Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

5


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended
September 30,
 
     2020     2019  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 6,669     $ 17,050  

Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:

    

Purchase of investments

     (57,382     (71,380

Principal repayments of investments

     1,000       53,926  

Net proceeds from the sale of investments

     1,104       34,539  

Net realized gain on investments

     (1,374     (21,677

Net unrealized depreciation of investments

     3,246       19,901  

Net unrealized appreciation of other

     —         164  

Amortization of premiums, discounts, and acquisition costs, net

     (9     (9

Amortization of deferred financing costs and discounts

     840       746  

Bad debt expense, net of recoveries

     60       148  

Changes in assets and liabilities:

    

Decrease in interest receivable

     1,232       79  

Increase in due from administrative agent

     (1,342     (534

Increase in other assets, net

     (100     (33

(Decrease) increase in accounts payable and accrued expenses

     (216     861  

Increase in fees due to Adviser(A)

     525       16  

(Decrease) increase in fee due to Administrator(A)

     (224     79  

Decrease in other liabilities

     (13,412     (9,879
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (59,383     23,997  
  

 

 

   

 

 

 
    

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of common stock

     1,772       —    

Discounts, commissions, and offering costs for issuance of common stock

     (31     —    

Proceeds from line of credit

     81,500       100,000  

Repayments on line of credit

     (14,100     (106,200

Proceeds from issuance of mandatorily redeemable preferred stock

     6,283       —    

Deferred financing and offering costs

     (634     (133

Distributions paid to common stockholders

     (16,911     (17,330
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     57,879       (23,663
  

 

 

   

 

 

 
    

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     (1,504     334  
  

 

 

   

 

 

 
    

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT BEGINNING OF PERIOD

     4,060       3,605  
  

 

 

   

 

 

 
    

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD

   $ 2,556     $ 3,939  
  

 

 

   

 

 

 
    

CASH PAID FOR INTEREST

   $ 1,374     $ 1,536  
  

 

 

   

 

 

 

 

(A) 

Refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

6


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

  Principal/Shares/
Units(F)(J)
     Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 87.7%

       

Secured First Lien Debt – 56.3%

       

Containers, Packaging, and Glass – 2.6%

       

Frontier Packaging, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 3/2021)(L)

  $ 9,500      $ 9,500      $ 9,500  

Diversified/Conglomerate Manufacturing – 1.1%

       

Phoenix Door Systems, Inc. – Line of Credit, $80 available (L+7.0%, 9.0% Cash (0.3% Unused Fee), Due 3/2021)(L)

    670        670        670  

Phoenix Door Systems, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 9/2024)(L)

    3,200        3,200        3,200  
    

 

 

    

 

 

 
       3,870        3,870  

Diversified/Conglomerate Services – 31.2%

       

Bassett Creek Services, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 4/2023)(K)

    37,500        37,500        35,672  

Counsel Press, Inc. – Term Debt (L+11.8%, 12.8% Cash, Due 3/2023)(L)

    18,000        18,000        18,000  

Counsel Press, Inc. – Term Debt (L+13.0%, 14.0% Cash, Due 3/2023)(L)

    5,500        5,500        5,500  

Horizon Facilities Services, Inc. – Term Debt (L+9.5%, 12.0% Cash, Due 6/2024)(G)(L)

    27,700        27,700        27,700  

Mason West, LLC – Line of Credit, $2,651 available (L+8.0%, 10.0% Cash, Due 7/2021)(L)

    349        349        349  

Mason West, LLC – Term Debt (L+10.0%, 12.5% Cash, Due 7/2025)(L)

    25,250        25,250        25,250  
    

 

 

    

 

 

 
           114,299      112,471  

Healthcare, Education, and Childcare – 5.5%

       

Educators Resource, Inc. – Term Debt (L+10.5%, 13.0% Cash, Due 11/2023)(L)

    20,000        20,000        20,000  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 6.8%

       

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 1/2023)(L)

    17,700        17,700        17,700  

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 1/2023)(L)

    6,850        6,850        6,850  
    

 

 

    

 

 

 
           24,550      24,550  

Leisure, Amusement, Motion Pictures, and Entertainment – 6.0%

       

Schylling, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2024)(L)

    13,081        13,081        13,081  

Schylling, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2024)(L)

    8,500        8,500        8,500  
    

 

 

    

 

 

 
           21,581      21,581  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 3.1%

       

SBS Industries Holdings, Inc. – Term Debt (L+5.0%, 7.0% Cash, Due 11/2024)(L)

    11,355        11,355        11,355  
    

 

 

    

 

 

 

Total Secured First Lien Debt

     $ 205,155      $ 203,327  
    

 

 

    

 

 

 

Secured Second Lien Debt – 11.6%

       

Automobile – 1.1%

       

Country Club Enterprises, LLC – Term Debt (L+8.0%, 10.0% Cash, Due 2/2022)(K)

  $ 4,000      $ 4,000      $ 3,830  

Country Club Enterprises, LLC – Guaranty ($1,000)(T)

    —          —          —    
    

 

 

    

 

 

 
           4,000      3,830  

Cargo Transport – 3.5%

       

Diligent Delivery Systems – Term Debt (L+9.0%, 11.0% Cash, Due 11/2022)(K)

    13,000        12,960        12,772  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 3.7%

       

Ginsey Home Solutions, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 1/2025)(H)(L)

    13,300        13,300        13,300  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 3.3%

       

SBS Industries Holdings, Inc. – Term Debt (L+12.0%, 14.0% Cash, Due 11/2024)(L)

    11,736        11,736        11,736  
    

 

 

    

 

 

 

Total Secured Second Lien Debt

     $ 41,996      $ 41,638  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

7


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
    Cost      Fair Value  

Preferred Equity – 16.4%

       

Containers, Packaging, and Glass – 0.4%

       

Frontier Packaging, Inc. – Preferred Stock(C)(L)

     1,373     $ 1,373      $ 1,457  

Diversified/Conglomerate Services – 8.7%

       

Bassett Creek Services, Inc. – Preferred Stock(C)(L)

     4,900       4,900        —    

Counsel Press, Inc. – Preferred Stock(C)(L)

     6,995       6,995        18,614  

Horizon Facilities Services, Inc. – Preferred Stock(C)(L)

     10,080       10,080        1,285  

Mason West, LLC – Preferred Stock(C)(L)

     11,206       11,206        11,206  
    

 

 

    

 

 

 
       33,181        31,105  

Healthcare, Education, and Childcare – 1.5%

       

Educators Resource, Inc. – Preferred Stock(C)(L)

     8,560       8,560        5,410  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.6%

       

Brunswick Bowling Products, Inc. – Preferred Stock(C)(L)

     4,943       4,943        6,625  

Ginsey Home Solutions, Inc. – Preferred Stock(C)(L)

     19,280       9,583        10,089  
    

 

 

    

 

 

 
       14,526        16,714  

Leisure, Amusement, Motion Pictures, and Entertainment – 1.2%

       

Schylling, Inc. – Preferred Stock(C)(L)

     4,000       4,000        4,263  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.0%

       

SBS Industries Holdings, Inc. – Preferred Stock(C)(L)

     27,705       2,771        —    
    

 

 

    

 

 

 

Total Preferred Equity

     $ 64,411      $ 58,949  
    

 

 

    

 

 

 

Common Equity/Equivalents – 3.4%

       

Cargo Transport – 0.0%

       

Diligent Delivery Systems – Common Stock Warrants(C)(L)

     8   $ 500      $ —    

Containers, Packaging, and Glass – 3.3%

       

Frontier Packaging, Inc. – Common Stock(C)(L)

     153       153        11,937  

Diversified/Conglomerate Manufacturing – 0.1%

       

Phoenix Door Systems, Inc. – Common Stock(C)(L)

     2,515       1,200        329  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 0.0%

       

Ginsey Home Solutions, Inc. – Common Stock(C)(L)

     63,747       8        —    

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.0%

       

SBS Industries Holdings, Inc. – Common Stock(C)(L)

     221,500       222        —    

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Funko Acquisition Holdings, LLC(M) – Common Units(C)(S)

     12,180       58        48  
    

 

 

    

 

 

 

Total Common Equity/Equivalents

     $ 2,141      $ 12,314  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 313,703      $ 316,228  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

8


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
     Cost      Fair Value  

AFFILIATE INVESTMENTS(O) – 73.3%

        

Secured First Lien Debt – 42.3%

        

Beverage, Food, and Tobacco – 2.5%

        

Head Country, Inc. – Term Debt (L+10.5%, 12.5% Cash, Due 2/2021)(L)

     9,050      $ 9,050      $ 9,050  

Chemicals, Plastics, and Rubber – 5.7%

        

PSI Molded Plastics, Inc. – Term Debt (L+5.5%, 7.0% Cash, Due 1/2024)(G)(L)

     26,618      $ 26,618      $ 20,522  

Diversified/Conglomerate Manufacturing – 6.2%

        

D.P.M.S., Inc. – Line of Credit, $250 available (L+6.5%, 9.0% Cash (0.5% Unused Fee), Due 10/2021)(L)

     1,250        1,250        1,250  

D.P.M.S., Inc. – Term Debt (10.0% Cash, Due 10/2021)(I)(L)

     10,796        10,796        8,158  

Edge Adhesives Holdings, Inc.(M) – Line of Credit, $0 available (L+8.0%, 10.0% Cash, Due 12/2020)(K)

     1,020        1,020        995  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+10.5%, 12.5% Cash, Due 2/2022)(K)

     9,300        9,300        9,068  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+11.8%, 13.8% Cash, Due 2/2022)(K)

     3,000        3,000        2,925  
     

 

 

    

 

 

 
        25,366        22,396  

Diversified/Conglomerate Services – 14.0%

        

ImageWorks Display and Marketing Group, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 11/2022)(L)

     22,000        22,000        22,000  

The Maids International, LLC – Line of Credit, $1,000 available (L+7.5%, 9.5% Cash (0.3% Unused Fee), Due 3/2021)(L)

     —          —          —    

The Maids International, LLC – Term Debt (L+10.5%, 12.0% Cash, Due 3/2025)(L)

     28,560        28,560        28,560  
     

 

 

    

 

 

 
        50,560        50,560  

Leisure, Amusement, Motion Pictures, and Entertainment – 2.4%

        

SOG Specialty Knives & Tools, LLC – Term Debt (Due 12/2023)(L)(R)

     538        538        538  

SOG Specialty Knives & Tools, LLC – Term Debt (L+4.0%, 6.0% Cash, Due 12/2023)(G)(L)

     8,399        8,399        8,399  
     

 

 

    

 

 

 
        8,937        8,937  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 7.3%

        

The Mountain Corporation – Line of Credit, $0 available (L+5.0%, 9.0% Cash, Due 4/2021)(G)(L)

     3,400        3,400        3,400  

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 13.0% Cash, Due 8/2022)(L)

     23,100        23,100        23,100  
     

 

 

    

 

 

 
        26,500        26,500  

Telecommunications – 4.2%

        

B+T Group Acquisition, Inc.(M) – Line of Credit, $0 available (L+11.0%, 13.0% Cash, Due 12/2021)(G)(K)

     2,800        2,800        2,534  

B+T Group Acquisition, Inc.(M) – Term Debt (L+11.0%, 13.0% Cash, Due 12/2021)(G)(K)

     14,000        14,000        12,670  
     

 

 

    

 

 

 
        16,800        15,204  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 163,831      $ 153,169  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

9


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
     Cost      Fair
Value
 

Secured Second Lien Debt – 13.5%

        

Diversified/Conglomerate Services – 12.8%

        

J.R. Hobbs Co. – Atlanta, LLC – Line of Credit, $0 available (L+6.0%, 8.0% Cash, Due 10/2024)(L)

     10,000      $ 10,000      $ 10,000  

J.R. Hobbs Co. – Atlanta, LLC – Term Debt (L+10.3%, 11.8% Cash, Due 10/2024)(L)

     36,000        36,000        36,000  
     

 

 

    

 

 

 
        46,000        46,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.7%

        

The Mountain Corporation – Term Debt (L+4.0%, 7.0% Cash, Due 4/2024)(G)(L)

     11,700        11,700        2,377  

The Mountain Corporation – Delayed Draw Term Debt, $1,200 available (L+4.0%, 7.0% Cash, Due 4/2024)(G)(L)

     300        300        61  
     

 

 

    

 

 

 
        12,000        2,438  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 58,000      $ 48,438  
     

 

 

    

 

 

 

Preferred Equity – 17.5%

        

Beverage, Food, and Tobacco – 1.2%

        

Head Country, Inc. – Preferred Stock(C)(L)

     4,000      $ 4,000      $ 4,342  

Chemicals, Plastics, and Rubber – 0.0%

        

PSI Molded Plastics, Inc. – Preferred Stock(C)(L)

     158,598        19,730        —    

Diversified/Conglomerate Manufacturing – 0.0%

        

Channel Technologies Group, LLC – Preferred Stock(C)(L)

     2,279        1,841        —    

Edge Adhesives Holdings, Inc.(M) – Preferred Stock(C)(L)

     8,199        8,199        —    
     

 

 

    

 

 

 
        10,040        —    

Diversified/Conglomerate Services – 3.7%

        

ImageWorks Display and Marketing Group, Inc. – Preferred Stock(C)(L)

     67,490        6,749        8,363  

J.R. Hobbs Co. – Atlanta, LLC – Preferred Stock(C)(L)

     10,920        10,920        —    

The Maids International, LLC – Preferred Stock(C)(L)

     6,640        6,640        5,073  
     

 

 

    

 

 

 
        24,309        13,436  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 5.8%

        

Old World Christmas, Inc. – Preferred Stock(C)(L)

     7,450        7,450        20,868  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.7%

        

SOG Specialty Knives & Tools, LLC – Preferred Stock(C)(L)

     14,949        14,949        2,549  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 6.1%

        

The Mountain Corporation – Preferred Stock(C)(L)

     6,899        6,899        —    

Pioneer Square Brands, Inc. – Preferred Stock(C)(L)

     5,502        5,500        21,975  
     

 

 

    

 

 

 
        12,399        21,975  

Telecommunications – 0.0%

        

B+T Group Acquisition, Inc.(M) – Preferred Stock(C)(L)

     14,304        4,722        —    
     

 

 

    

 

 

 

Total Preferred Equity

      $ 97,599      $ 63,170  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

10


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
    Cost      Fair Value  

Common Equity/Equivalents – 0.0%

       

Diversified/Conglomerate Manufacturing – 0.0%

       

Channel Technologies Group, LLC – Common Stock(C)(L)

     2,319,184     $ —        $ —    

D.P.M.S., Inc. – Common Stock(C)(L)

     627       1        —    
    

 

 

    

 

 

 
       1        —    

Diversified/Conglomerate Services – 0.0%

       

Nth Degree Investment Group, LLC – Common Stock(C)(L)

     14,360,000       1,219        —    

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

The Mountain Corporation – Common Stock(C)(L)

     751       1        —    

Telecommunications – 0.0%

       

B+T Group Acquisition, Inc.(M) – Common Stock Warrant(C)(L)

     3.5     —          —    
    

 

 

    

 

 

 

Total Common Equity/Equivalents

     $ 1,221      $ —    
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 320,651      $ 264,777  
    

 

 

    

 

 

 

CONTROL INVESTMENTS(P) – 7.8%:

       

Secured Second Lien Debt – 2.8%

       

Aerospace and Defense – 2.8%

       

Galaxy Tool Holding Corporation – Line of Credit, $0 available (L+4.5%, 6.5% Cash (1.0% Unused Fee), Due 8/2021)(L)

   $ 5,000     $ 5,000      $ 5,000  

Galaxy Tool Holding Corporation – Term Debt (L+6.0%, 10.0% Cash, Due 8/2021)(L)

     5,000       5,000        5,000  
    

 

 

    

 

 

 
     $ 10,000      $ 10,000  
    

 

 

    

 

 

 

Preferred Equity – 5.0%

       

Aerospace and Defense – 5.0%

       

Galaxy Tool Holding Corporation – Preferred Stock(C)(L)

     5,517,444     $ 11,464      $ 17,957  

Common Equity – 0.0%

       

Aerospace and Defense – 0.0%

       

Galaxy Tool Holding Corporation – Common Stock(C)(L)

     88,843     $ 48      $ —    
    

 

 

    

 

 

 

Total Control Investments

     $ 21,512      $ 27,957  
    

 

 

    

 

 

 

TOTAL INVESTMENTS – 168.8%

     $ 655,866      $ 608,962  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

11


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(A) 

Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $476.4 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5 — Borrowings in the accompanying Notes to Consolidated Financial Statements. Additionally, under Section 55 of the Investment Company Act of 1940, as amended (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2020, our investment in Funko Acquisition Holdings, LLC (“Funko”) was considered a non-qualifying asset under Section 55 of the 1940 Act and represented less than 0.1% of total investments, at fair value.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 0.1% as of September 30, 2020. If applicable, paid-in-kind interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or 30-day LIBOR plus a spread. Due dates represent the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2020.

(E) 

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(F) 

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

(H) 

$5.1 million of the debt security was participated to a third party, but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as Secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2020.

(I) 

Debt security has a fixed interest rate.

(J) 

Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

(K) 

Fair value was based on internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC. Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(L) 

Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(M) 

One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

(N) 

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(O) 

Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

(P) 

Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

(Q) 

Reserved.

(R) 

Debt security does not have a stated current interest rate.

(S) 

Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible into class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(T) 

Refer to Note 10 — Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information regarding this guaranty.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

12


Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
     Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) – 79.4%

        

Secured First Lien Debt – 46.8%

        

Containers, Packaging, and Glass – 2.6%

        

Frontier Packaging, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 3/2021)(L)

   $ 9,500      $ 9,500      $ 9,500  

Diversified/Conglomerate Manufacturing – 1.0%

        

Phoenix Door Systems, Inc – Line of Credit, $380 available (L+7.0%, 9.0% Cash (0.3% Unused Fee), Due 3/2021)(L)

     370        370        370  

Phoenix Door Systems, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 9/2024)(L)

     3,200        3,200        3,200  
     

 

 

    

 

 

 
            3,570      3,570  

Diversified/Conglomerate Services – 24.1%

        

Bassett Creek Services, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 4/2023)(L)

     37,500        37,500        37,500  

Counsel Press, Inc. – Term Debt (L+11.8%, 12.8% Cash, Due 3/2023)(L)

     18,000        18,000        18,000  

Counsel Press, Inc. – Term Debt (L+13.0%, 14.0% Cash, Due 3/2023)(L)

     5,500        5,500        5,500  

Horizon Facilities Services, Inc. – Term Debt (L+9.5%, 12.0% Cash, Due 6/2024)(L)

     27,700        27,700        27,700  
     

 

 

    

 

 

 
            88,700      88,700  

Healthcare, Education, and Childcare – 5.4%

        

Educators Resource, Inc. – Term Debt (L+10.5%, 13.0% Cash, Due 11/2023) (L)

     20,000        20,000        20,000  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 4.8%

        

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 1/2023) (L)

     17,700        17,700        17,700  

Leisure, Amusement, Motion Pictures, and Entertainment – 5.8%

        

Schylling, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2024)(L)

     13,081        13,081        13,081  

Schylling, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 8/2024)(L)

     8,500        8,500        8,500  
     

 

 

    

 

 

 
            21,581      21,581  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 3.1%

        

SBS Industries Holdings, Inc. – Term Debt (L+12.0%, 14.0% Cash, Due 11/2024)(L)

     11,355        11,355        11,355  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 172,406      $ 172,406  
     

 

 

    

 

 

 

Secured Second Lien Debt – 13.1%

        

Automobile – 1.0%

        

Country Club Enterprises, LLC – Term Debt (L+8.0%, 10.0% Cash, Due 2/2022)(K)

   $ 4,000      $ 4,000      $ 3,600  

Country Club Enterprises, LLC – Guaranty ($1,000)(U)

                    
     

 

 

    

 

 

 
            4,000      3,600  

Cargo Transport – 3.4%

        

Diligent Delivery Systems – Term Debt (L+9.0%, 11.0% Cash, Due 11/2022)(K)

     13,000        12,951        12,545  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 5.5%

        

Brunswick Bowling Products, Inc. – Term Debt (L+10.0%, 12.0% Cash, Due 1/2023)(L)

     6,850        6,850        6,850  

Ginsey Home Solutions, Inc. – Term Debt (L+10.0%, 13.5% Cash, Due 1/2021)(H)(L)

     13,300        13,300        13,300  
     

 

 

    

 

 

 
            20,150      20,150  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 3.2%

        

SBS Industries Holdings, Inc. – Term Debt (L+12.0%, 14.0% Cash, Due 11/2024)(L)

     11,736        11,736        11,736  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 48,837      $ 48,031  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

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GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
    Cost      Fair Value  

Preferred Equity – 16.5%

       

Containers, Packaging, and Glass – 0.4%

       

Frontier Packaging, Inc. – Preferred Stock(C)(L)

     1,373     $ 1,373      $ 1.400  

Diversified/Conglomerate Services – 6.3%

       

Bassett Creek Services, Inc. – Preferred Stock(C)(L)

     4,900       4,900        —    

Counsel Press, Inc. – Preferred Stock(C)(L)

     6,995       6,995        20,593  

Horizon Facilities Services, Inc. – Preferred Stock(C)(L)

     10,080       10,080        2,699  
    

 

 

    

 

 

 
           21,975      23,292  

Healthcare, Education, and Childcare – 1.5%

       

Educators Resource, Inc. – Preferred Stock(C)(L)

     8,560       8,560        5,563  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 7.1%

       

Brunswick Bowling Products, Inc. – Preferred Stock(C)(L)

     4,943       4,943        19,848  

Ginsey Home Solutions, Inc. – Preferred Stock(C)(L)

     19,280       9,583        6,419  
    

 

 

    

 

 

 
           14,526      26,267  

Leisure, Amusement, Motion Pictures, and Entertainment – 1.2%

       

Schylling, Inc. – Preferred Stock(C)(L)

     4,000       4,000        4,332  

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.0%

       

SBS Industries Holdings, Inc. – Preferred Stock(C)(L)

     27,705       2,771        —    
    

 

 

    

 

 

 

Total Preferred Equity

     $ 53,205      $ 60,854  
    

 

 

    

 

 

 

Common Equity/Equivalents – 3.0%

       

Cargo Transport – 0.2%

       

Diligent Delivery Systems – Common Stock Warrants(C)(L)

     8   $ 500      $ 771  

Containers, Packaging, and Glass – 2.6%

       

Frontier Packaging, Inc. – Common Stock(C)(L)

     152       152        9,460  

Diversified/Conglomerate Manufacturing– 0.2%

       

Phoenix Door Systems, Inc. – Common Stock(C)(L)

     2,515       1,200        574  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 0.0%

       

Ginsey Home Solutions, Inc. – Common Stock(C)(L)

     63,747       8        —    

Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) – 0.0%

       

SBS Industries Holdings, Inc. – Common Stock(C)(L)

     221,500       222        —    

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Funko Acquisition Holdings, LLC(M) – Common Units(C)(S)

     12,180       59        33  
    

 

 

    

 

 

 

Total Common Equity/Equivalents

     $ 2,141      $ 10,838  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 276,589      $ 292,129  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
     Cost      Fair Value  

AFFILIATE INVESTMENTS(O) – 67.0%

        

Secured First Lien Debt – 36.8%

        

Beverage, Food, and Tobacco – 2.5%

        

Head Country, Inc. – Term Debt (L+10.5%, 12.5% Cash, Due 2/2021)(L)

     9,050        9,050        9,050  

Diversified/Conglomerate Manufacturing – 6.4%

        

D.P.M.S., Inc. – Line of Credit, $250 available (L+6.5%, 9.0% Cash (0.5% Unused Fee), Due 10/2021)(L)

     1,250        1,250        1,250  

D.P.M.S., Inc. – Term Debt (10.0% Cash, Due 10/2021)(I)(L)

     10,796        10,796        10,796  

Edge Adhesives Holdings, Inc.(M) – Line of Credit, $600 available (L+8.0%, 10.0% Cash, Due 5/2020)(K)

     420        420        395  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+10.5%, 12.5% Cash, Due 2/2022)(K)

     9,300        9,300        8,742  

Edge Adhesives Holdings, Inc.(M) – Term Debt (L+11.8%, 13.8% Cash, Due 2/2022)(K)

     3,000        3,000        2,820  
     

 

 

    

 

 

 
            24,766      24,003  

Diversified/Conglomerate Services – 14.0%

        

ImageWorks Display and Marketing Group, Inc. – Term Debt (L+11.0%, 13.0% Cash, Due 11/2022)(L)

     22,000        22,000        22,000  

The Maids International, LLC – Line of Credit, $0 available (L+7.5%, 9.5% Cash (0.3% Unused Fee), Due 3/2021)(L)

     1,000        1,000        1,000  

The Maids International, LLC – Term Debt (L+10.5%, 12.0% Cash, Due 3/2025)(L)

     28,560        28,560        28,560  
     

 

 

    

 

 

 
            51,560      51,560  

Leisure, Amusement, Motion Pictures, and Entertainment – 2.4%

        

SOG Specialty Knives & Tools, LLC – Term Debt (Due 8/2020)(L)(R)

     538        538        538  

SOG Specialty Knives & Tools, LLC – Term Debt (L+4.0%, 6.0% Cash, Due 8/2022)(G)(L)

     8,399        8,399        8,399  
     

 

 

    

 

 

 
            8,937      8,937  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 7.2%

        

The Mountain Corporation – Line of Credit, $0 available (L+5.0%, 9.0% Cash, Due 4/2021)(L)

     3,400        3,400        3,400  

Pioneer Square Brands, Inc. – Term Debt (L+12.0%, 13.0% Cash, Due 8/2022)(L)

     23,100        23,100        23,100  
     

 

 

    

 

 

 
            26,500      26,500  

Telecommunications – 4.3%

        

B+T Group Acquisition, Inc.(M) – Line of Credit, $0 available (L+11.0%, 13.0% Cash, Due 12/2021)(G)(K)

     2,800        2,800        2,632  

B+T Group Acquisition, Inc.(M) – Term Debt (L+11.0%, 13.0% Cash, Due 12/2021)(G)(K)

     14,000        14,000        13,160  
     

 

 

    

 

 

 
        16,800        15,792  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 137,613      $ 135,842  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
     Cost      Fair
Value
 

Secured Second Lien Debt – 17.7%

        

Chemicals, Plastics, and Rubber – 4.5%

        

PSI Molded Plastics, Inc. – Term Debt (L+12.0%, 13.5% Cash, Due 1/2024)(G)(L)

   $ 26,618      $ 26,618      $ 16,737  

Diversified/Conglomerate Services – 12.5%

        

J.R. Hobbs Co. – Atlanta, LLC – Line of Credit, $0 available (L+6.0%, 8.0% Cash, Due 10/2024)(L)

     10,000        10,000        10,000  

J.R. Hobbs Co. – Atlanta, LLC – Term Debt (L+10.3%, 11.8% Cash, Due 10/2024)(L)

     36,000        36,000        36,000  
     

 

 

    

 

 

 
            46,000      46,000  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.7%

        

The Mountain Corporation – Term Debt (L+4.0%, 7.0% Cash, Due 4/2024)(G)(L)

     11,700        11,700        2,572  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 84,318      $ 65,309  
     

 

 

    

 

 

 

Preferred Equity – 11.5%

        

Beverage, Food, and Tobacco – 0.9%

        

Head Country, Inc. – Preferred Stock(C)(L)

     4,000        4,000        3,495  

Chemicals, Plastics, and Rubber – 0.0%

        

PSI Molded Plastics, Inc. – Preferred Stock(C)(L)

     78,598        11,730        —    

Diversified/Conglomerate Manufacturing – 0.0%

        

Channel Technologies Group, LLC – Preferred Stock(C)(L)

     2,279        1,841        —    

Edge Adhesives Holdings, Inc.(M) – Preferred Stock(C)(L)

     8,199        8,199        —    
     

 

 

    

 

 

 
            10,040      —    

Diversified/Conglomerate Services – 3.6%

        

ImageWorks Display and Marketing Group, Inc. – Preferred Stock(C)(L)

     67,490        6,749        8,265  

J.R. Hobbs Co. – Atlanta, LLC – Preferred Stock(C)(L)

     10,920        10,920         

The Maids International, LLC – Preferred Stock(C)(L)

     6,640        6,640        5,339  
     

 

 

    

 

 

 
            24,309      13,604  

Home and Office Furnishings, Housewares, and Durable Consumer Products – 5.3%

        

Old World Christmas, Inc. – Preferred Stock(C)(L)

     6,180        6,180        19,588  

Leisure, Amusement, Motion Pictures, and Entertainment – 0.1%

        

SOG Specialty Knives & Tools, LLC – Preferred Stock(C)(L)

     14,949        14,949        390  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.6%

        

The Mountain Corporation – Preferred Stock(C)(L)

     6,899        6,899        —    

Pioneer Square Brands, Inc. – Preferred Stock(C)(L)

     5,502        5,500        5,760  
     

 

 

    

 

 

 
            12,399      5,760  

Telecommunications – 0.0%

        

B+T Group Acquisition, Inc.(M) – Preferred Stock(C)(L)

     14,304        4,722        —    
     

 

 

    

 

 

 

Total Preferred Equity

      $ 88,329      $ 42,837  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(D)(E)

   Principal/Shares/
Units(F)(J)
    Cost      Fair Value  

Common Equity/Equivalents – 1.0%

       

Diversified/Conglomerate Manufacturing – 0.0%

       

Channel Technologies Group, LLC – Common Stock(C)(L)

     2,319,184       —          —    

D.P.M.S., Inc. – Common Stock(C)(L)

     627       1        —    
    

 

 

    

 

 

 
       1        —    

Diversified/Conglomerate Services – 1.0%

       

Nth Degree Investment Group, LLC – Common Stock(C)(L)

     14,360,000       1,219        3,649  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

The Mountain Corporation – Common Stock(C)(L)

     751       1        —    

Telecommunications – 0.0%

       

B+T Group Acquisition, Inc.(M) – Common Stock Warrants(C)(L)

     3.5     —          —    
    

 

 

    

 

 

 

Total Common Equity/Equivalents

     $ 1,221      $ 3,649  
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 311,481      $ 247,637  
    

 

 

    

 

 

 

CONTROL INVESTMENTS(P) – 7.2%:

       

Secured Second Lien Debt – 2.8%

       

Aerospace and Defense – 2.8%

       

Galaxy Tool Holding Corporation – Line of Credit, $0 available (L+4.5%, 6.5% Cash (1.0% Unused Fee), Due 8/2021)(L)

   $ 5,000     $ 5,000      $ 5,000  

Galaxy Tool Holding Corporation – Term Debt (L+6.0%, 10.0% Cash, Due 8/2021)(L)

     5,000       5,000        5,000  
    

 

 

    

 

 

 
     $ 10,000      $ 10,000  
    

 

 

    

 

 

 

Preferred Equity – 4.4%

       

Aerospace and Defense – 4.4%

       

Galaxy Tool Holding Corporation – Preferred Stock(C)(L)

     5,517,444     $ 11,464      $ 16,158  

Common Equity – 0.0%

       

Aerospace and Defense – 0.0%

       

Galaxy Tool Holding Corporation – Common Stock(C)(L)

     88,843     $ 48      $ —    
    

 

 

    

 

 

 

Total Control Investments

     $ 21,512      $ 26,158  
    

 

 

    

 

 

 

TOTAL INVESTMENTS – 153.6%(V)

     $ 609,582      $ 565,924  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

(A) 

Certain of the securities listed are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $496.4 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Additionally, under Section 55 of the 1940 Act, we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of March 31, 2020, our investment in Funko was considered a non-qualifying asset under Section 55 of the 1940 Act and represented less than 0.1% of total investments, at fair value.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day LIBOR, which was 1.0% as of March 31, 2020. If applicable, paid-in-kind interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or 30-day LIBOR plus a spread. Due dates represent the contractual maturity date.

(C) 

Security is non-income producing.

(D) 

Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of March 31, 2020.

(E) 

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(F) 

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(G) 

Debt security is on non-accrual status.

(H) 

$5.1 million of the debt security was participated to a third party, but is accounted for as collateral for a secured borrowing under accounting principles generally accepted in the U.S. and presented as Secured borrowing on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2020.

(I) 

Debt security has a fixed interest rate.

(J) 

Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

(K) 

Fair value was based on internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(L) 

Fair value was based on the total enterprise value of the portfolio company, which is generally allocated to the portfolio company’s securities in order of their relative priority in the capital structure. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(M) 

One of our affiliated funds, Gladstone Capital Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

(N) 

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(O) 

Affiliate investments, as defined by the 1940 Act, are those that are not Control investments and in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

(P) 

Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

(Q) 

Reserved.

(R) 

Debt security does not have a stated current interest rate.

(S) 

Our investment in Funko was valued using Level 2 inputs within the ASC 820 fair value hierarchy. Our common units in Funko are convertible into class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(T) 

Reserved.

(U) 

Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information regarding this guaranty.

(V) 

Cumulative gross unrealized depreciation for federal income tax purposes is $105.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $60.7 million. Cumulative net unrealized depreciation is $44.6 million, based on a tax cost of $610.5 million.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

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Table of Contents

GLADSTONE INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)

(UNAUDITED)

NOTE 1. ORGANIZATION

Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and are applying the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies” (“ASC 946”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily take the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time, and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. We intend that our investment portfolio over time will consist of approximately 75.0% in debt investments and 25.0% in equity investments, at cost.

Gladstone Business Investment, LLC (“Business Investment”), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of holding certain investments pledged as collateral under our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 12 — Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and an SEC-registered investment adviser, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4 — Related Party Transactions for more information regarding these arrangements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of SEC Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended September 30, 2020 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2021 or any future interim period. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2020, as filed with the SEC on May 12, 2020.

 

19


Table of Contents

Use of Estimates

Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements. Actual results may differ from those estimates.

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Board Responsibility

In accordance with the 1940 Act, our board of directors (“Board of Directors”) has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials, presented by the chief valuation officer. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and determine in good faith the fair value of such investments in accordance with the Policy.

There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.

ICE Data Pricing and Reference Data, LLC (“ICE”), a valuation specialist, generally provides estimates of fair value on our debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances before determining fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances before determining fair value.

 

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Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

   

Total Enterprise Value — In determining the fair value using a TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA obtained from our indexing methodology whereby the original transaction EBITDA at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

TEV is primarily calculated using EBITDA; however, TEV may also be calculated using revenue multiples or a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses a DCF analysis to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit-impaired portfolio companies.

 

   

Yield Analysis — The Valuation Team generally determines the fair value of our debt investments for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including: estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default, and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.

 

   

Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.

 

   

Investments in Funds — For equity investments in other funds for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the portfolio company operates.

 

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Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

Refer to Note 3 — Investments for additional information regarding fair value measurements and our application of ASC 820.

Revenue Recognition

Interest Income Recognition

Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest income is deemed to be collectible. As of September 30, 2020, our loans to B+T Group Acquisition, Inc. (“B+T”), Horizon Facilities Services, Inc. (“Horizon”), The Mountain Corporation (“The Mountain”), PSI Molded Plastics, Inc. (“PSI Molded”), and SOG Specialty Knives & Tools, LLC (“SOG”) were on non-accrual status, with an aggregate debt cost basis of $94.9 million, or 19.8% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $77.7 million, or 17.0% of the fair value of all debt investments in our portfolio. As of March 31, 2020, certain of our loans to B+T, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $63.5 million, or 14.0% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $43.5 million, or 10.1% of the fair value of all debt investments in our portfolio.

Paid-in-kind (“PIK”) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. As of September 30, 2020 and March 31, 2020, we did not have any loans with a PIK interest component.

Success Fee Income Recognition

We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.

Dividend Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.

Related Party Fees

We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (the “Credit Facility”).

We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services.

Refer to Note 4 — Related Party Transactions for additional information regarding these related party fees and agreements.

 

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Recent Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value” (“ASU 2018-13”), which modifies the disclosure requirements in ASC 820. ASU 2018-13 was effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, and we adopted ASU 2018-13 effective April 1, 2020. The adoption of ASU 2018-13 did not have a material impact on our financial position, results of operations or cash flows.

NOTE 3. INVESTMENTS

Fair Value

In accordance with ASC 820, we determine the fair value of our investments to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

   

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

 

   

Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists, or instances where prices vary substantially over time or among brokered market makers; and

 

   

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

As of September 30, 2020 and March 31, 2020, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs.

We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. There were no transfers in or out of Level 1, 2 and 3 during the six months ended September 30, 2020 and 2019, respectively.

 

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As of September 30, 2020 and March 31, 2020, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

            Fair Value Measurements  
     Fair Value      Quoted Prices in
Active Markets
for Identical Assets

(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of September 30, 2020:

          

Secured first lien debt

   $ 356,496      $ —        $ —       $ 356,496  

Secured second lien debt

     100,076        —          —         100,076  

Preferred equity

     140,076        —          —         140,076  

Common equity/equivalents

     12,314        —          48 (A)      12,266  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments as of September 30, 2020

   $ 608,962      $ —        $ 48     $ 608,914  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

            Fair Value Measurements  
     Fair Value      Quoted Prices in
Active Markets
for Identical Assets

(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of March 31, 2020:

          

Secured first lien debt

   $ 308,248      $ —        $ —       $ 308,248  

Secured second lien debt

     123,340        —          —         123,340  

Preferred equity

     119,849        —          —         119,849  

Common equity/equivalents

     14,487        —          33 (A)      14,454  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments as of March 31, 2020

   $ 565,924      $ —        $ 33     $ 565,891  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(A)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to certain restrictions.

 

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The following table presents our investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of September 30, 2020 and March 31, 2020, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:

 

     Total Recurring Fair Value Measurements
Reported in
Consolidated Statements
of Assets and Liabilities
Valued Using Level 3 Inputs
 
     September 30, 2020      March 31, 2020  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 203,327      $ 172,406  

Secured second lien debt

     41,638        48,031  

Preferred equity

     58,949        60,854  

Common equity/equivalents(A)

     12,266        10,805  
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     316,180        292,096  

Affiliate Investments

     

Secured first lien debt

     153,169        135,842  

Secured second lien debt

     48,438        65,309  

Preferred equity

     63,170        42,837  

Common equity/equivalents

     —          3,649  
  

 

 

    

 

 

 

Total Affiliate Investments

     264,777        247,637  

Control Investments

     

Secured first lien debt

     —          —    

Secured second lien debt

     10,000        10,000  

Preferred equity

     17,957        16,158  

Common equity/equivalents

     —          —    
  

 

 

    

 

 

 

Total Control Investments

     27,957        26,158  
  

 

 

    

 

 

 

Total investments at fair value using Level 3 inputs

   $ 608,914      $ 565,891  
  

 

 

    

 

 

 

 

(A)

Excludes our investment in Funko with a fair value of $48 and $33 as of September 30, 2020 and March 31, 2020, respectively, which was valued using Level 2 inputs.

 

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In accordance with ASC 820, the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of September 30, 2020 and March 31, 2020. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted-average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.

 

     Quantitative Information about Level 3 Fair Value Measurements
     Fair Value as of     

Valuation
Technique/

Methodology

  

Unobservable
Input

  

Range / Weighted-Average as of

     September 30, 2020      March 31, 2020     

September 30, 2020

  

March 31, 2020

Secured first lien debt

   $ 292,633      $ 280,499      TEV    EBITDA multiple    4.1x – 8.0x / 6.3x    4.2x – 8.1x / 6.2x
            EBITDA   

$1,372 – $12,750 /

$6,591

  

$1,372 – $13,042 /

$5,894

            Revenue multiple    0.4x – 0.7x / 0.5x    0.3x – 0.7x / 0.5x
            Revenue    $12,501 – $26,113 / $17,970    $14,343 – $24,060 / $18,141
            Discount Rate    17.5% – 17.5% / 17.5%   
     63,863        27,749      Yield Analysis    Discount Rate    11.9% – 18.8% / 15.5%    16.2% – 18.7% / 16.8%

Secured second lien debt

     83,474        107,195      TEV    EBITDA multiple    5.0x – 6.3x / 5.4x    5.1x – 6.2x / 5.6x
            EBITDA    $4,942 – $10,486 / $8,294    $4,459 – $13,042 / $7,444
            Revenue multiple    0.7x – 0.7x / 0.7x    0.7x – 0.7x / 0.7x
            Revenue    $14,832 – $14,832 / $14,832    $15,267 – $15,267 / $15,267
     16,602        16,145      Yield Analysis    Discount Rate    11.9% – 13.5% / 12.3%    12.6% – 16.4% / 13.5%

Preferred equity

     140,076        119,849      TEV    EBITDA multiple    5.0x – 8.0x / 6.2x    5.1x – 8.1x / 6.1x
            EBITDA    $1,492 – $12,750 / $6,038    $356– $13,042 / $5,596
            Revenue multiple    0.4x – 0.7x / 0.6x    0.6x – 0.7x / 0.6x
            Revenue    $12,501 – $26,113 / $21,420    $15,267 – $24,060 / $21,283
            Discount Rate    17.5% – 17.5% / 17.5%   

Common equity/equivalents(A)

     12,266        14,454      TEV    EBITDA multiple    4.1x – 7.3x / 5.8x    4.2x – 7.4x / 5.9x
            EBITDA    $1,372 – $9,895 / $4,685    $1,372 – $16,061 / $9,258
            Revenue multiple    0.4x – 0.7x / 0.4x    0.7x – 0.7x / 0.7x
            Revenue    $12,501 – $14,832 / $12,509    $15,267 – $15,267 / $15,267
  

 

 

    

 

 

             

Total

   $ 608,914      $ 565,891     
  

 

 

    

 

 

    

 

(A)

Fair value as of both September 30, 2020 and March 31, 2020 excludes our investment in Funko with a fair value of $48 and $33, respectively, which was valued using Level 2 inputs.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in discount rates or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.

 

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Changes in Level 3 Fair Value Measurements of Investments

The following tables provide our portfolio’s changes in fair value, broken out by security type, during the three and six months ended September 30, 2020 and 2019 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  
Three Months ended September 30, 2020:           

Fair value as of June 30, 2020

   $ 312,628     $ 116,134     $ 122,237     $ 10,295     $ 561,294  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         —         114       114  

Net unrealized appreciation (depreciation)(B)

     1,355       951       (2,636     1,971       1,641  

Reversal of previously recorded (appreciation) depreciation upon realization(B)

     —         —         —         —         —    

New investments, repayments and settlements(C):

          

Issuances / originations

     33,399       105       23,581       —         57,085  

Settlements / repayments

     (8,000     —         —         —         (8,000

Sales

     —         —         (3,106     (114     (3,220

Transfers(D)

     17,114       (17,114     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2020

   $ 356,496     $ 100,076     $ 140,076     $ 12,266     $ 608,914  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  
Six Months ended September 30, 2020:           

Fair value as of March 31, 2020

   $ 308,248     $ 123,340     $ 119,849     $ 14,454     $ 565,891  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         —         114       114  

Net unrealized appreciation (depreciation)(B)

     (1,215     390       (248     (2,188     (3,261

Reversal of previously recorded (appreciation) depreciation upon realization(B)

     —         —         —         —         —    

New investments, repayments and settlements(C):

          

Issuances / originations

     33,499       310       23,581       —         57,390  

Settlements / repayments

     (8,000     —         —         —         (8,000

Sales

     —         —         (3,106     (114     (3,220

Transfers(D)

     23,964       (23,964     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2020

   $ 356,496     $ 100,076     $ 140,076     $ 12,266     $ 608,914  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  
Three Months ended September 30, 2019:           

Fair value as of June 30, 2019

   $ 338,586     $ 76,475     $ 188,639     $ 27,099     $ 630,799  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         2,788       17,576       20,364  

Net unrealized appreciation (depreciation)(B)

     (1,532     (2,503     1,178       (1,202     (4,059

Reversal of previously recorded (appreciation) depreciation upon realization(B)

     —         67       (2,672     (10,029     (12,634

New investments, repayments and settlements(C):

          

Issuances / originations

     12,450       5,005       1,500       1,200       20,155  

Settlements / repayments

     (7,640     (13,300     —         —         (20,940

Sales

     —         —         (7,902     (17,617     (25,519

Transfers(D)

     (41,000     41,000       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2019

   $ 300,864     $ 106,744     $ 183,531     $ 17,027     $ 608,166  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Secured     Secured           Common        
     First Lien     Second Lien     Preferred     Equity/        
     Debt     Debt     Equity     Equivalents     Total  
Six Months ended September 30, 2019:           

Fair value as of March 31, 2019

   $ 331,090     $ 75,293     $ 195,377     $ 22,011     $ 623,771  

Total gain (loss):

          

Net realized gain (loss)(A)

     —         —         1,533       19,295       20,828  

Net unrealized appreciation (depreciation)(B)

     (1,700     (1,325     (9,367     6,451       (5,941

Reversal of previously recorded (appreciation) depreciation upon realization(B)

     —         67       (2,121     (11,748     (13,802

New investments, repayments and settlements(C):

          

Issuances / originations

     53,100       5,009       12,080       1,200       71,389  

Settlements / repayments

     (40,626     (13,300     —         —         (53,926

Sales

     —         —         (13,971     (20,182     (34,153

Transfers(D)

     (41,000     41,000       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of September 30, 2019

   $ 300,864     $ 106,744     $ 183,531     $ 17,027     $ 608,166  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended September 30, 2020 and 2019.

(B)

Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the respective periods ended September 30, 2020 and 2019.

(C)

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.

(D)

2020: Transfers represent (1) secured second lien debt of Brunswick Bowling Products, Inc. with a total cost basis and fair value of $6.9 million, which was converted into secured first lien debt during the three months ended June 30, 2020 and (2) secured second lien debt of PSI Molded, with a total cost basis and fair value of $26.6 million and $17.1 million, respectively, which was converted into secured first lien debt during the three months ended September 30, 2020.

2019: Transfers represent (1) secured first lien debt of B-Dry, LLC with a cost basis of $11.9 million and a fair value of $0, which was converted into equity during the three months ended June 30, 2019 and (2) secured first lien debt of J.R. Hobbs Co. – Atlanta, LLC, with a total cost basis and fair value of $41.0 million, which was converted into secured second lien debt during the three months ended September 30, 2019.

Investment Activity

During the six months ended September 30, 2020, the following significant transactions occurred:

 

   

In July 2020, we invested $46.9 million in Mason West, LLC (“Mason West”) through a combination of secured first lien debt and preferred equity. Mason West, headquartered in Placentia, California, is a provider of engineered seismic restraint and vibration isolation solutions. In September 2020, Mason West repaid $7.0 million of secured first lien debt and redeemed $3.1 million of preferred equity, which was included in Due from administrative agent in our accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2020.

 

   

In September 2020, we invested an additional $8.0 million into PSI Molded in the form of preferred equity and also amended certain terms of our existing debt.

Investment Concentrations

As of September 30, 2020, our investment portfolio consisted of investments in 29 portfolio companies located in 17 states across 14 different industries with an aggregate fair value of $609.0 million. Our investments in J.R. Hobbs Co. – Atlanta, LLC, Pioneer Square Brands, Inc., Counsel Press, Inc., Mason West, and Bassett Creek Services, Inc. represented our five largest portfolio investments at fair value as of September 30, 2020, and collectively comprised $205.7 million, or 33.8%, of our total investment portfolio at fair value.

 

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The following table summarizes our investments by security type as of September 30, 2020 and March 31, 2020:

 

     September 30, 2020     March 31, 2020  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 368,986        56.3   $ 356,496        58.5   $ 310,019        50.9   $ 308,248        54.5

Secured second lien debt

     109,996        16.8       100,076        16.4       143,155        23.5       123,340        21.8  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

     478,982        73.1       456,572        74.9       453,174        74.4       431,588        76.3  

Preferred equity

     173,474        26.4       140,076        23.0       152,998        25.1       119,849        21.2  

Common equity/equivalents

     3,410        0.5       12,314        2.1       3,410        0.5       14,487        2.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity/equivalents

     176,884        26.9       152,390        25.1       156,408        25.6       134,336        23.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 655,866        100.0   $ 608,962        100.0   $ 609,582        100.0   $ 565,924        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of September 30, 2020 and March 31, 2020:

 

     September 30, 2020     March 31, 2020  
     Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

Diversified/Conglomerate Services

   $ 253,572        41.6   $ 226,805        40.1

Home and Office Furnishings, Housewares, and Durable Consumer Products

     75,432        12.4       83,705        14.8  

Personal and Non-Durable Consumer Products (Manufacturing Only)

     50,961        8.4       34,865        6.2  

Leisure, Amusement, Motion Pictures, and Entertainment

     37,330        6.1       35,240        6.2  

Aerospace and Defense

     27,957        4.6       26,158        4.6  

Diversified/Conglomerate Manufacturing

     26,595        4.4       28,147        5.0  

Healthcare, Education, and Childcare

     25,410        4.2       25,563        4.5  

Machinery (Non-agriculture, Non-construction, and Non-electronic)

     23,091        3.8       23,091        4.1  

Containers, Packaging, and Glass

     22,894        3.8       20,360        3.6  

Chemicals, Plastics, and Rubber

     20,522        3.4       16,737        3.0  

Telecommunications

     15,204        2.5       15,792        2.8  

Beverage, Food, and Tobacco

     13,392        2.2       12,545        2.2  

Cargo Transport

     12,772        2.1       13,316        2.4  

Other < 2.0%

     3,830        0.5       3,600        0.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 608,962        100.0   $ 565,924        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value were included in the following geographic regions of the U.S. as of September 30, 2020 and March 31, 2020:

 

     September 30, 2020     March 31, 2020  

Location

   Fair Value      Percentage of
Total Investments
    Fair Value      Percentage of
Total Investments
 

South

   $ 179,219        29.4   $ 182,178        32.2

Northeast

     150,522        24.7       146,434        25.9  

West

     146,584        24.1       90,214        15.9  

Midwest

     132,637        21.8       147,098        26.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 608,962        100.0   $ 565,924        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.

 

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Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2020:

 

     Amount  

For the remaining six months ending March 31:

   2021    $ 20,240  

For the fiscal years ending March 31:

   2022      58,894  
   2023      106,150  
   2024      93,055  
   2025      175,432  
   Thereafter      25,250  
     

 

 

 
  

Total contractual repayments

   $ 479,021  
  

Adjustments to cost basis of debt investments

     (39
  

Investments in equity securities

     176,884  
     

 

 

 
  

Total cost basis of investments held as of September 30, 2020:

   $ 655,866  
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of September 30, 2020 and March 31, 2020, we had gross receivables from portfolio companies of $1.3 million and $1.4 million, respectively. As of each of September 30, 2020 and March 31, 2020, the allowance for uncollectible receivables was $0.9 million.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We pay the Adviser certain fees as compensation for its services under the Advisory Agreement, consisting of a base management fee and an incentive fee and a loan servicing fee for the Adviser’s role as servicer pursuant to the Credit Facility, all as described below. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of either party, approved the annual renewal of the Advisory Agreement through August 31, 2021.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. David Dullum (our president) is also the executive vice president of private equity (buyouts) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary), is also the executive vice president of administration of our Adviser.

 

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The following table summarizes the base management fees, loan servicing fees, incentive fees, and associated non-contractual, unconditional, and irrevocable credits reflected in our accompanying Consolidated Statements of Operations:

 

     Three Months Ended September 30,     Six Months Ended September 30,  
     2020     2019     2020     2019  

Average total assets subject to base management fee(A)

   $ 597,800     $ 628,790     $ 584,500     $ 631,500  

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

     2,989       3,144       5,845       6,315  

Credits to fees from Adviser - other(B)

     (1,070     (608     (1,805     (1,830
  

 

 

   

 

 

   

 

 

   

 

 

 

Net base management fee

   $ 1,919     $ 2,536     $ 4,040     $ 4,485  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,747       1,593       3,456       3,345  

Credits to base management fee - loan servicing fee(B)

     (1,747     (1,593     (3,456     (3,345
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan servicing fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee – income-based

   $ —       $ 742     $ —       $ 2,823  

Incentive fee – capital gains-based(C)

     452       858       (302     346  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incentive fee(B)

   $ 452     $ 1,600     $ (302   $ 3,169  

Credits to fees from Adviser - other(B)

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net total incentive fee

   $ 452     $ 1,600     $ (302   $ 3,169  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B)  Reflected as a line item on our accompanying Consolidated Statement of Operations.

(C)  The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement.

Base Management Fee

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective period and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees received for such services against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $71 and $97 for the three and six months ended September 30, 2020, respectively, and $37 and $87 for the three and six months ended September 30, 2019, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily related to the valuation of portfolio companies.

Loan Servicing Fee

The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under the Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (less any uninvested cash or cash equivalents resulting from borrowings) during any given calendar year, we treat payment of the loan servicing fee pursuant to the Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.

 

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Incentive Fee

The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive fee.

The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed as follows:

 

   

No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate;

 

   

100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and

 

   

20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.

The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. As of September 30, 2020, no capital gains-based incentive fees were contractually due to the Adviser. During the year ended March 31, 2020, capital gains-based incentive fees of $8.1 million were contractually due and paid to the Adviser.

In accordance with GAAP, accrual of the capital gains-based incentive fee is determined as if our investments had been liquidated at their fair values as of the end of the reporting period. Therefore, GAAP requires that the capital gains-based incentive fee accrual consider the aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. Accordingly, a GAAP accrual is calculated at the end of the reporting period based on (i) cumulative aggregate realized capital gains since our inception, plus (ii) the entire portfolio’s aggregate unrealized capital appreciation, if any, less (iii) cumulative aggregate realized capital losses since our inception, less (iv) the entire portfolio’s aggregate unrealized capital depreciation, if any. If such amount is positive at the end of a reporting period, a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of capital gains-based incentive fees accrued in all prior years, is recorded, regardless of whether such amount is contractually due under the terms of the Advisory Agreement. If such amount is negative, then there is no accrual for such period and prior period accruals are reversed, as appropriate. During the three months ended September 30, 2020, we recorded capital gains-based incentive fees of $0.5 million. During the six months ended September 30, 2020, we recorded a reversal of $0.3 million of previously accrued capital gains-based incentive fees. During the three and six months ended September 30, 2019, we recorded capital gains-based incentive fees of $0.9 million and $0.3 million, respectively.

Transactions with the Administrator

We reimburse the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrator’s employees, including: our chief financial officer and treasurer, chief valuation officer, chief compliance officer, and general counsel and secretary, and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Mr. LiCalsi (our general counsel & secretary), serves as the Administrator’s president as well as the executive vice president of administration for the Adviser.

 

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Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the annual renewal of the Administration Agreement through August 31, 2021.

Transactions with Gladstone Securities

Gladstone Securities, LLC (“Gladstone Securities”) is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is 100% owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

Dealer Manager Agreement

On May 22, 2020, the Company, entered into a dealer manager agreement (the “Dealer Manager Agreement”), with Gladstone Securities whereby Gladstone Securities will serve as the Company’s exclusive dealer manager in connection with the Company’s offering (the “Offering”) of up to $350.0 million aggregate principal amount of the Company’s 6.00% Notes due 2040 (the “Notes”) on a “reasonable best efforts” basis.

Under the Dealer Manager Agreement, Gladstone Securities will provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay (i) selling commissions of up to 6.0% of the gross proceeds from sales of the Notes in the Offering and (ii) a dealer manager fee of up to 3.0% of the gross proceeds from sales of the Notes in the Offering (the “Dealer Manager Fee”). Gladstone Securities may, in its sole discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. During the six months ended September 30, 2020, no Notes were sold and there were no selling commissions or Dealer Manager Fee incurred pursuant to the Dealer Manager Agreement.

Other Transactions

From time to time, Gladstone Securities provides other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which it receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. During the three and six months ended September 30, 2020, the fees received by Gladstone Securities from portfolio companies totaled $0.4 million. During the three and six months ended September 30, 2019, the fees received by Gladstone Securities from portfolio companies totaled $0.0 million and $0.4 million, respectively.

Related Party Fees Due

Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:

 

     As of September 30,      As of March 31,  
     2020      2020  

Base management and loan servicing fee due to Adviser, net of credits

   $ 606      $ (222

Incentive fee due to Adviser(A)

     7,085        7,387  

Other due to Adviser

     40        13  
  

 

 

    

 

 

 

Total fees due to Adviser

   $ 7,731      $ 7,178  

Fee due to Administrator

   $ 358      $ 582  
  

 

 

    

 

 

 

Total related party fees due

   $ 8,089      $ 7,760  
  

 

 

    

 

 

 

 

(A)

Includes a capital gains-based incentive fee of $7.1 million and $7.4 million, respectively, recorded in accordance with GAAP requirements, and which was not contractually due under the terms of the Advisory Agreement as of September 30, 2020 and March 31, 2020. Refer to Note 4 — Related Party TransactionsTransactions with the AdviserIncentive Fee for additional information, including capital gains-based incentive fee payments made.

Net expenses receivable from Gladstone Capital Corporation, one of our affiliated funds, for reimbursement purposes, which includes certain co-investment expenses, totaled $0 and $70 as of September 30, 2020 and March 31, 2020, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in Other assets, net on the accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2020 and March 31, 2020, respectively.

 

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NOTE 5. BORROWINGS

Revolving Line of Credit

On August 22, 2018, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013 and as previously amended, with KeyBank National Association (“KeyBank”) as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended to August 22, 2021, and if not renewed or extended by such date, all principal and interest will be due and payable on August 22, 2023 (two years after the revolving period end date). Additionally, the Credit Facility commitment amount was increased from $165.0 million to $200.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of $300.0 million through additional commitments from existing or new lenders.

On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amends the Credit Facility to (i) add London Interbank Offered Rate (“LIBOR”) replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from $200.0 million to $180.0 million, which may be expanded to $300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. In addition, Amendment No. 5 provides for certain temporary changes during the COVID-19 Relief Period (which began on August 10, 2020 and ends on March 31, 2021, and which may be extended, subject to certain conditions) including: (i) amending the definition of “Effective Advance Rate,” provided that during such period the overall effective advance rate does not exceed 55%; and (ii) removing or changing certain “Excess Concentration Limits” (as defined in the Credit Facility).

Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum until August 21, 2021, with the margin then increasing to 3.10% for the period from August 22, 2021 to August 21, 2022, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount.

The following tables summarize noteworthy information related to the Credit Facility:

 

     As of September 30,      As of March 31,  
     2020      2020  

Commitment amount

   $ 180,000      $ 200,000  

Borrowings outstanding at cost

     116,600        49,200  

Availability(A)

     63,400        150,800  

 

     For the Three Months Ended
September 30,
    For the Six Months Ended
September 30,
 
     2020     2019     2020     2019  

Weighted-average borrowings outstanding

   $ 106,123     $ 57,120     $ 80,503     $ 49,935  

Effective interest rate(B)

     3.6     7.8     4.5     8.4

Commitment (unused) fees incurred

   $ 122     $ 364     $ 490     $ 763  

 

(A)

Availability is subject to various constraints, characteristics and applicable advance rates based on collateral quality under the Credit Facility, which equated to an adjusted availability of $63.4 million and $137.6 million as of September 30, 2020 and March 31, 2020, respectively.

(B)

Excludes the impact of deferred financing costs and includes unused commitment fees.

Among other things, the Credit Facility contains a performance guaranty that requires us to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of $210.0 million or $210.0 million plus 50% of all equity and subordinated debt raised, minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $224.4 million as of September 30, 2020, (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act); and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2020, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $495.4 million, asset coverage on our senior securities representing indebtedness of 502.1%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of September 30, 2020, we were in compliance with all covenants under the Credit Facility.

 

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Notes Offering

In May 2020, we entered into a Dealer Manager Agreement with our affiliated dealer manager, Gladstone Securities, under which we may sell a maximum of $350.0 million aggregate principal amount of our 6.00% notes due 2040. However, the Company can only offer for sale up to $200.0 million aggregate principal amount of the Notes pursuant to a prospectus supplement dated May 22, 2020 and a base prospectus dated July 24, 2019 relating to the registration statement on Form N-2 (File No. 333- 232124) under the Securities Act of 1933, as amended.

The Notes will mature on November 1, 2040. We will pay interest on the Notes on the first day of each month, commencing on the first day of the month following the issuance of such Note. Subject to certain limitations, holders of the Notes will have the option to tender their Notes for redemption at a redemption price of $22.50 per Note until the earlier of the date upon which our Board of Directors, by resolution, suspends or terminates the optional redemption right of the holders or the date, if any, on which the Notes are listed on Nasdaq Global Select Market or another national securities exchange. In addition, we will repurchase the Notes, upon request, in the event of the holder’s death at a redemption price of $25.00 per Note. Except upon the occurrence of certain events that would constitute a change in control of us or to comply with applicable law, we may not redeem the Notes at our option until the later of (1) the one-year anniversary of the termination of the offering of the Notes and (2) July 1, 2025. After such date, we may, at our sole option, redeem all or a portion of the Notes at a redemption price of $25.00 per Note. The Notes will be our direct unsecured obligations and rank equal in right of payment with all outstanding and future unsecured, unsubordinated indebtedness issued by us. As of September 30, 2020, no Notes have been issued.

Secured Borrowing

In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC Topic 860, “Transfers and Servicing” requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflect the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2025.

Fair Value

We elected to apply the fair value option of ASC Topic 825, “Financial Instruments,” to the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of the Credit Facility is determined using a yield analysis, which includes a DCF calculation and also takes into account the assumptions the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of September 30, 2020, the discount rate used to determine the fair value of the Credit Facility was 30-day LIBOR, with a 0.5% floor, plus 2.85% per annum, plus an unused commitment fee of 0.5%. As of March 31, 2020, the discount rate used to determine the fair value of the Credit Facility was 30-day LIBOR, plus 2.85% per annum, plus an unused commitment fee of 1.0%. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of the Credit Facility. As of each of September 30, 2020 and March 31, 2020, the Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized depreciation of other on our accompanying Consolidated Statements of Operations.

 

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The following tables provide relevant information and disclosures about the Credit Facility as of September 30, 2020 and March 31, 2020, and for the three and six months ended September 30, 2020 and 2019, as required by ASC 820:

 

     Level 3 – Borrowings  
     Recurring Fair Value Measurements  
     Reported in Consolidated  
     Statements of Assets and Liabilities Using
Significant Unobservable Inputs (Level 3)
 
     September 30, 2020      March 31, 2020  

Credit Facility

   $ 116,600      $ 49,200  
  

 

 

    

 

 

 

 

Fair Value Measurements of Borrowings Using Significant  
Unobservable Inputs (Level 3) Reported in  
Consolidated Statements of Assets and Liabilities  
     Credit  
     Facility  

Three Months Ended September 30, 2020:

  

Fair value at June 30, 2020

   $ 59,500  

Borrowings

     63,300  

Repayments

     (6,200

Unrealized depreciation

     —    
  

 

 

 

Fair value at September 30, 2020

   $ 116,600  
  

 

 

 

Six Months Ended September 30, 2020:

  

Fair value at March 31, 2020

   $ 49,200  

Borrowings

     81,500  

Repayments

     (14,100

Unrealized depreciation

     —    
  

 

 

 

Fair value at September 30, 2020

   $ 116,600  
  

 

 

 

 

Fair Value Measurements of Borrowings Using Significant  
Unobservable Inputs (Level 3) Reported in  
Consolidated Statements of Assets and Liabilities  
     Credit  
     Facility  

Three Months Ended September 30, 2019:

  

Fair value at June 30, 2019

   $ 73,795  

Borrowings

     25,500  

Repayments

     (52,200

Unrealized depreciation

     (131
  

 

 

 

Fair value at September 30, 2019

   $ 46,964  
  

 

 

 

Six Months Ended September 30, 2019:

  

Fair value at March 31, 2019

   $ 53,000  

Borrowings

     100,000  

Repayments

     (106,200

Unrealized appreciation

     164  
  

 

 

 

Fair value at September 30, 2019

   $ 46,964  
  

 

 

 

The fair value of the collateral under the Credit Facility was $476.4 million and $496.4 million as of September 30, 2020 and March 31, 2020, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

Preferred Stock Offerings

In May 2020, we entered into sales agreements with Wedbush Securities, Inc. (“Wedbush”) and Virtu Americas LLC (“Virtu”) (each a “Series E ATM Sales Agent”), under which we have the ability to issue and sell shares of our 6.375% Series E Cumulative Term Preferred Stock (our “Series E Term Preferred Stock” or “Series E”), from time to time, through the Series E ATM Sales Agents, up to $50.0 million aggregate liquidation preference in an “at-the-market” program (the “Series E ATM Program”). As of September 30, 2020, we had remaining capacity to sell up to $43.5 million of our Series E Term Preferred Stock under the Series E ATM Program.

 

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During the six months ended September 30, 2020, we sold 258,610 shares of our Series E Term Preferred Stock under the Series E ATM Program with Wedbush and Virtu with an aggregate liquidation preference of $6.5 million. The weighted-average gross price per share net of discounts was $24.29 and resulted in gross proceeds of approximately $6.3 million. After deducting commissions and offering costs borne by us, net proceeds totaled approximately $6.2 million.

The following tables summarize our 6.250% Series D Cumulative Term Preferred Stock (our “Series D Term Preferred Stock” or “Series D”) and our Series E Term Preferred Stock outstanding as of September 30, 2020 and March 31, 2020:

As of September 30, 2020:

 

Class of Term
Preferred Stock

   Ticker Symbol    Date Issued    Mandatory
Redemption
Date(A)
   Interest Rate   Shares
Outstanding
     Liquidation
Preference per
Share
     Aggregate
Liquidation
Preference
 
Series D    GAINM    September 26,
2016
   September 30,

2023

   6.250%     2,300,000      $ 25.00      $ 57,500  
Series E    GAINL    August 22,
2018
   August 31,

2025

   6.375%     3,248,610        25.00        81,215  
             

 

 

    

 

 

    

 

 

 

Term preferred stock, gross(A)

    5,548,610      $ 25.00      $ 138,715  

Less: Discounts

          (2,993
       

 

 

 

Term preferred stock, net(B)

        $ 135,722  
       

 

 

 

As of March 31, 2020:

 

Class of Term
Preferred Stock

   Ticker Symbol    Date Issued    Mandatory
Redemption
Date(A)
   Interest Rate   Shares
Outstanding
     Liquidation
Preference per
Share
     Aggregate
Liquidation
Preference
 
Series D    GAINM    September 26,
2016
   September 30,

2023

   6.250%     2,300,000      $ 25.00      $ 57,500  
Series E    GAINL    August 22,
2018
   August 31,

2025

   6.375%     2,990,000        25.00        74,750  
             

 

 

    

 

 

    

 

 

 

Term preferred stock, gross(A)

    5,290,000      $ 25.00      $ 132,250  

Less: Discounts

          (3,090
       

 

 

 

Term preferred stock, net(B)

        $ 129,160  
       

 

 

 

 

(A)

As of September 30, 2020 and March 31, 2020, asset coverage on our senior securities that are stock, calculated pursuant to Sections 18 and 61 of the 1940 Act, was 235.9% and 293.8%, respectively.

(B)

Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities pursuant to the adoption of Accounting Standard Update 2015-03,Simplifying the Presentation of Debt Issuance Costs.

 

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The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series of mandatorily redeemable preferred stock during the six months ended September 30, 2020 and 2019:

For the Six Months Ended September 30, 2020:

 

Declaration Date

   RecordDate    Payment Date    Dividend per
Share of
Series D Term
Preferred Stock
     Dividend per
Share of
Series E Term
Preferred Stock
 
April 14, 2020    April 24, 2020    April 30, 2020    $ 0.13020833      $ 0.13281250  
April 14, 2020    May 19, 2020    May 29, 2020      0.13020833        0.13281250  
April 14, 2020    June 19, 2020    June 30, 2020      0.13020833        0.13281250  
July 14, 2020    July 24, 2020    July 31, 2020      0.13020833        0.13281250  
July 14, 2020    August 24, 2020    August 31, 2020      0.13020833        0.13281250  
July 14, 2020    September 23, 2020    September 30, 2020      0.13020833        0.13281250  
        

 

 

    

 

 

 
      Total    $ 0.78124998      $ 0.79687500  
        

 

 

    

 

 

 

For the Six Months Ended September 30, 2019:

 

Declaration Date

   RecordDate    Payment Date    Dividend per
Share of
Series D Term
Preferred Stock
     Dividend per
Share of
Series E Term
Preferred Stock
 
April 9, 2019    April 22, 2019    April 30, 2019    $ 0.13020833      $ 0.13281250  
April 9, 2019    May 22, 2019    May 31, 2019      0.13020833        0.13281250  
April 9, 2019    June 19, 2019    June 28, 2019      0.13020833        0.13281250  
July 9, 2019    July 22, 2019    July 31, 2019      0.13020833        0.13281250  
July 9, 2019    August 20, 2019    August 30, 2019      0.13020833        0.13281250  
July 9, 2019    September 17, 2019    September 30, 2019      0.13020833        0.13281250  
        

 

 

    

 

 

 
      Total    $ 0.78124998      $ 0.79687500  
        

 

 

    

 

 

 

The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income or capital gains to the extent of our current and accumulated earnings and profits and are reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. If we determined the tax characterization of dividends paid to preferred stockholders in the current calendar year as of September 30, 2020, 41.9% would be from ordinary income and 58.1% would be from capital gains.

In accordance with ASC Topic 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities on the balance sheet. Our mandatorily redeemable preferred stock is recorded at the liquidation preference, less discounts, on our accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2020 and March 31, 2020. The related dividend payments to preferred stockholders are treated as dividend expense on our accompanying Consolidated Statements of Operations on the ex-dividend date.

The following table summarizes the fair value of each of our series of mandatorily redeemable preferred stock based on the last reported closing sale price as of September 30, 2020 and March 31, 2020, each of which we consider to be a Level 1 input within the fair value hierarchy:

 

     Fair Value as of  
     September 30, 2020      March 31, 2020  

Series D Term Preferred Stock

   $ 56,649      $ 53,590  

Series E Term Preferred Stock

     78,162        64,554  
  

 

 

    

 

 

 

Total

   $ 134,811      $ 118,144  
  

 

 

    

 

 

 

 

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NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

Registration Statement

On June 14, 2019, we filed a registration statement on Form N-2 (File No. 333-232124), which the SEC declared effective on July 24, 2019. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of September 30, 2020, we had the ability to issue up to $288.6 million of the securities registered under the registration statement.

Common Equity Offerings

In December 2019, we entered into equity distribution agreements with Wedbush, Cantor Fitzgerald & Co., and Ladenburg Thalmann & Co., Inc. (each a “Common Stock ATM Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Common Stock ATM Sales Agents, up to an aggregate offering price of $35.0 million in an at-the-market program (the “Common Stock ATM Program”). As of September 30, 2020, we had remaining capacity to sell up to $30.1 million of common stock under the Common Stock ATM Program.

During the three months ended June 30, 2020, we sold 155,560 shares of our common stock under the Common Stock ATM Program with Wedbush at a weighted-average gross price of $11.39 per share and raised approximately $1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $11.17 and resulted in total net proceeds of approximately $1.7 million. These sales were above our then current estimated NAV per share. We did not sell any shares of our common stock under the Common Stock ATM Program during the three months ended September 30, 2020.

During the year ended March 31, 2020, we sold 227,004 shares of our common stock under the Common Stock ATM Program with Wedbush at a weighted-average gross price of $13.80 per share and raised approximately $3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $13.55 and resulted in total net proceeds of approximately $3.1 million. These sales were above our then current estimated NAV per share.

NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED-AVERAGE COMMON SHARE

The following table sets forth the computation of basic and diluted Net increase in net assets resulting from operations per weighted-average common share for the three and six months ended September 30, 2020 and 2019:

 

     Three Months Ended September 30,      Six Months Ended September 30,  
     2020      2019      2020      2019  

Numerator: net increase in net assets resulting from operations

   $ 6,630      $ 11,004      $ 6,669      $ 17,050  

Denominator: basic and diluted weighted-average common shares

     33,205,023        32,822,459        33,148,652        32,822,459  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net increase in net assets resulting from operations per weighted-average common share

   $ 0.20      $ 0.34      $ 0.20      $ 0.52  
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors and is based upon management’s estimate of Investment Company Taxable Income and net long-term capital gains, as well as amounts to be distributed in accordance with Section 855(a) of the Code. Based on that estimate, our Board of Directors declares monthly distributions, and supplemental distributions, as appropriate, to stockholders each quarter and deemed distributions of long-term capital gains annually as of the end of the fiscal year, as applicable.

The U.S. federal income tax characteristics of cash distributions paid to our common stockholders generally are reported to stockholders on IRS Form 1099 after the end of each calendar year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of cash distributions for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. If we determined the tax characterization of cash distributions paid to common stockholders in the current calendar year as of September 30, 2020, 93.6% would be from ordinary income and 6.4% would be from capital gains.

 

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We paid the following cash distributions to our common stockholders for the six months ended September 30, 2020 and 2019:

 

Fiscal Year

 

Declaration Date

 

Record Date

 

Payment Date

  Distribution
per Common Share
 
2021   April 14, 2020   April 24, 2020   April 30, 2020   $     0.070  
  April 14, 2020   May 19, 2020   May 29, 2020     0.070  
  April 14, 2020   June 8, 2020   June 17, 2020     0.090 (A) 
  April 14, 2020   June 19, 2020   June 30, 2020     0.070  
  July 14, 2020   July 24, 2020   July 31, 2020     0.070  
  July 14, 2020   August 24, 2020   August 31, 2020     0.070  
  July 14, 2020   September 23, 2020   September 30, 2020     0.070  
       

 

 

 
    Six Months Ended September 30, 2020:   $ 0.510  
     

 

 

 

Fiscal Year

 

Declaration Date

 

Record Date

 

Payment Date

  Distribution
per Common Share
 
2020   April 9, 2019   April 22, 2019   April 30, 2019   $ 0.068  
  April 9, 2019   May 22, 2019   May 31, 2019     0.068  
  April 9, 2019   June 5, 2019   June 14, 2019     0.090 (A) 
  April 9, 2019   June 19, 2019   June 28, 2019     0.068  
  July 9, 2019   July 22, 2019   July 31, 2019     0.068  
  July 9, 2019   August 20, 2019   August 30, 2019     0.068  
  July 9, 2019   September 4, 2019   September 13, 2019     0.030 (A) 
  July 9, 2019   September 17, 2019   September 30, 2019     0.068  
       

 

 

 
    Six Months Ended September 30, 2019:   $ 0.528  
     

 

 

 

 

(A)

Represents a supplemental distribution to common stockholders.

Aggregate cash distributions to our common stockholders declared and paid were $16.9 million and $17.3 million for the six months ended September 30, 2020 and 2019, respectively.

For the fiscal year ended March 31, 2020, Investment Company Taxable Income exceeded distributions declared and paid and, in accordance with Section 855(a) of the Code, we elected to treat $17.9 million of the first distributions paid subsequent to fiscal year-end, as having been paid in the prior year. In addition, for the fiscal year ended March 31, 2020, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.3 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.

For the three and six months ended September 30, 2020, we recorded $0.4 million and $0.6 million, respectively, of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed net investment income for both periods on our accompanying Consolidated Statements of Assets and Liabilities.

For the three and six months ended September 30, 2019, we recorded $0.9 million and $1.3 million, respectively, of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed (Overdistributed) net investment income for both periods on our Consolidated Statements of Assets and Liabilities.

We may distribute our net long-term capital gains, if any, in cash or elect to retain some or all of such gains, pay taxes at the U.S. federal corporate-level income tax rate on the amount retained, and designate the retained amount as a “deemed distribution.” If we elect to retain net long-term capital gains and deem them distributed, each U.S. common stockholder will be treated as if they received a distribution of their pro-rata share of the retained net long-term capital gain and the U.S. federal income tax paid. As a result, each U.S. common stockholder will (i) be required to report their pro rata share of the retained gain on their tax return as long-term capital gain, (ii) receive a refundable tax credit for their pro-rata share of federal income tax paid by us on the retained gain, and (iii) increase the tax basis of their shares of common stock by an amount equal to the deemed distribution less the tax credit. In order to use the deemed distribution approach, we must provide written notice to our common stockholders prior to the expiration of 60 days after the close of the relevant taxable year. For the year ended March 31, 2020, we elected to retain $38.0 million, or $1.15 per common share, of long-term capital gains and to treat them as deemed distributions to common stockholders. We incurred $8.0 million, or $0.24 per common share, of federal income taxes on behalf of common stockholders, which was included in Taxes on deemed distribution of long-term capital gains on our Consolidated Statements of Operations for the year ended March 31, 2020 and in Other liabilities on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2020 and which was paid during the three months ended June 30, 2020.

 

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In addition, we obtained clarification of the treatment of deemed distributions with respect to Virginia state taxes from the Virginia Department of Revenue, which ruled that Virginia state taxes are imposed. Related to this matter, we previously recorded a $3.0 million reserve for uncertain tax positions, which was included in Taxes on deemed distribution of long-term capital gains on our accompanying Consolidated Statements of Operations and in Other Liabilities on our accompanying Consolidated Statements of Assets and Liabilities as of and for the year ended March 31, 2019. During the three months ended June 30, 2020, we reported and paid this amount with an amended Virginia tax return. As a result of the ruling, we also incurred $2.3 million of Virginia state taxes related to the deemed distribution for the year ended March 31, 2020, which was included in Taxes on deemed distribution of long-term capital gains on our Consolidated Statements of Operations for the year ended March 31, 2020 and in Other Liabilities on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2020 and which was paid during the three months ended September 30, 2020.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimabl